Long-term Investors: Be Wary of the Momentum Trade

The momentum trade, i.e., following the herd and investing money in sectors which have shown near-term outperformance, has become a very popular (and profitable) play in recent years, as the stock market has continued to transform into what has been described by some as a “new golden era” of investing.

With a handful of companies comprising a significant percentage of North American stock markets, betting on the continued rise of technology giants and innovation-first companies has made many investors very rich, and has become a go-to investing strategy for many expecting this trend to continue indefinitely.

With other sectors such as the Canadian cannabis sector, cryptocurrencies, and other tech-specific sub sectors seeing double- or triple-digit growth year to date, the temptation to pile into these trades in a bid for massive short-term returns may be too hard to ignore.

Sticking to prudent long-term fundamental investing principles has become more and more difficult for many, given the disconnect between short-term returns in the aforementioned hyper-growth sectors and other sectors such as commodities or industrial stocks.

The alternative to a new “golden age” of investing is a rather unpopular view that we may in fact be headed into the tail end of a bull market, with a potential correction on the horizon ready to shave off a significant percentage of the near-term returns growth investors have experienced over the past two years.

With value stocks traditionally outperforming growth stocks in time of distress, maintaining a balance between the two may be the most prudent advice for momentum investors heading into 2018.